Note: This is an earnings call transcript. Content may contain errors.

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DATE

Friday, Oct. 31, 2025, at 9 a.m. ET

CALL PARTICIPANTS

  • Executive Chairman and Co-Founder — Robert A. Ortenzio
  • Chief Executive Officer — Thomas Mullen
  • Executive Vice President and Chief Financial Officer — Michael F. Malatesta

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RISKS

  • Adjusted EBITDA margin in the outpatient rehab segment fell from 9.1% in the prior year to 7.4% due to a decrease in net revenue per visit, impacted by reduced Medicare reimbursement and an unfavorable shift in payer mix.
  • Thomas Mullen stated, “the fixed loss threshold continuing to increase at a pretty dramatic rate over the last four years.”
  • Michael F. Malatesta noted, “Medicare has been a headwind that we've had to deal with for all of 2025 and actually the last few years, it's significant,” referring to sustained rate pressures in the outpatient segment.
  • Upcoming reimplementation of the CMS 20% transmittal rule in October 2025 is expected to create a headwind for the critical illness recovery hospital segment in 2026, though “about the labor markets and being farther from the pandemic.”

TAKEAWAYS

  • Consolidated Revenue -- $1.36 billion, up more than 7% from $1.27 billion in the prior year
  • Adjusted EBITDA -- $111.7 million, up more than 7% from $103.9 million in the prior year
  • Earnings Per Share -- $0.23 from continuing operations, an increase of more than 21% compared to $0.19 in the prior year
  • Inpatient Rehabilitation -- Revenue rose 16% year over year to $328.6 million and adjusted EBITDA grew 13% to $68 million; occupancy improved to 83% from 82% in the prior year with same-store occupancy at 86% from 85% in the prior year
  • Outpatient Rehabilitation -- Revenue increased 4% to $325.4 million but net revenue per visit declined to $100 from $101 in the prior year adjusted EBITDA fell more than 14% to $24.2 million driven by rate pressure and payer mix shift.
  • Critical Illness Recovery Hospital -- Revenue increased more than 4% year over year to $609.9 million and adjusted EBITDA rose more than 10% to $56.1 million; admissions up 2.1% with steady occupancy at 65% and margin improvement to 9.2% from 8.7% in the prior year
  • CMS 20% Transmittal Rule Delay -- The rule’s deferment generated a $12 million–$15 million adjusted EBITDA benefit; impact for 2026 estimated as approximately “a third” of 2025’s effect, according to Michael F. Malatesta.
  • Development and Growth Pipeline -- Added a 30-bed critical illness recovery hospital in Memphis and three outpatient clinics; 395 inpatient rehab beds to be added by 2027 through new or expanded facilities, with multiple hospital openings identified.
  • Cash Position and Debt -- Ended the period with $60.1 million in cash, $1.8 billion in debt, net leverage at 3.4 times, and $419.1 million of availability on the revolving loan.
  • Dividend -- Quarterly cash dividend of $0.0625 per share approved, payable Nov. 25, 2025, to stockholders of record as of Nov. 12, 2025.
  • 2025 Outlook -- Revenue guidance reaffirmed at $5.3 billion–$5.5 billion and adjusted EBITDA at $510 million–$530 million; earnings per share guidance increased to $1.14–$1.24.
  • Capital Expenditures -- Maintenance capex projected at $100 million–$105 million within the full-year estimate of $180 million–$200 million
  • Labor Costs -- agency utilization in the critical illness segment stable around 15%, with hourly rates at pre-COVID levels.

SUMMARY

Select Medical Holdings (SEM 3.72%) delivered notable top-line and adjusted EBITDA growth year over year accompanied by strategic portfolio expansion and regulatory developments. Management credited the deferral of the CMS 20% transmittal rule for a sizable one-time EBITDA benefit of $12 million to $15 million (non-GAAP), but signaled a smaller impact when the rule resumes. The company raised earnings per share guidance while holding its adjusted EBITDA outlook steady, citing persistent softness in the outpatient rehabilitation segment. Segment trends diverged, as inpatient rehabilitation outpaced guidance expectations and outpatient rehabilitation adjusted EBITDA margin declined to 7.4% due to Medicare pressure and an adverse payer mix shift. The development pipeline remains robust with new facility openings and ongoing partnerships, and financial discipline was emphasized through dividend declaration and stable net leverage.

  • Michael F. Malatesta stated, “approximately 80% of our Medicare Advantage is line is linked directly to the Part B fee schedule.”
  • Year-to-date decrease in days sales outstanding to 56 days at September 30, 2025, from 58 days at December 31, 2024, demonstrates improvement in collections.
  • Cash flow from operating activities reached $175.3 million, with financing activity outflows of $135 million, including $100 million in net revolving debt repayments and $7.7 million in dividends.
  • Management noted a “more stable environment” according to Michael F. Malatesta for labor across business lines, while start-up losses for new rehabilitation hospitals are projected to remain consistent at $15 million–$20 million annually.
  • Joint venture partnerships, such as those with Cleveland Clinic, Cox Health, Banner Health, and Atlanticaire, are central to expansion plans targeting both new markets and capacity-constrained geographies.

INDUSTRY GLOSSARY

  • LTACH: Long-Term Acute Care Hospital, specializing in treatment for patients with complex medical conditions requiring extended hospitalization.
  • 20% Transmittal Rule: CMS policy affecting Medicare outlier payment reconciliation for cost reporting periods, designed to limit aggregate outlier payments to approximately 8% of total payments; often refers to adjustments affecting reimbursement thresholds.
  • Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, modified to exclude certain non-recurring, non-cash, or irregular items for comparability across periods and within industry norms.
  • ADC (Average Daily Census): The average number of inpatients receiving care each day within a specific period.
  • DSO (Days Sales Outstanding): Average number of days required to collect payment after a sale has been made; a measure of receivables efficiency.
  • Medicare Advantage: A type of Medicare health plan offered by private companies that contract with CMS to provide all Medicare Part A and B benefits.
  • Start-up losses: Initial operating losses incurred during the establishment phase of a new hospital or clinic before reaching break-even or maturity.

Full Conference Call Transcript

Robert A. Ortenzio: Thank you, operator. Good morning, everyone. Welcome to Select Medical Holdings Corporation's Third Quarter 2025 Earnings Call. As our custom, I'll provide some overview of the quarter and comment on our development efforts, and then I'll turn the call over to our CEO, Thomas Mullen. Let me begin with a regulatory update that affects our critical illness recovery hospital segment. On September 22nd, CMS announced the deferment of its expanded Medicare outlier reconciliation criteria.

Operator: What we commonly have referred to as the 20% transmittal rule.

Robert A. Ortenzio: It was originally slated to apply to cost reporting periods beginning on or after October 1, 2024. This rule will now be effective for periods beginning on or after October 1, 2025. The rule's deferral resulted in a favorable revenue adjustment recorded this quarter. We are pleased with the delay of the transmittal and expect the rule to have much less of an impact as labor costs are more stabilized in the cost years now affected by the change. This should resolve in fewer of our hospitals subjected to an outlier payment reconciliation.

While we are pleased with CMS's decision to delay the implementation of the 20% transmittal rule, we believe further reform is needed to ensure Medicare policy supports treatment of high acuity patients in our long-term acute care hospitals. We will continue to actively advocate for policies that enable us to provide critical care for these patients. I would now like to turn to an update on development. During the third quarter, we acquired a 30-bed Critical Illness Recovery Hospital in Memphis, Tennessee, and grew our outpatient portfolio by three clinics. Future development efforts remain focused on our inpatient rehabilitation segment.

Between now and 2027, we expect to add 395 inpatient rehabilitation beds through a combination of new openings and strategic bed additions. This month, we opened our fourth rehab hospital with our joint venture partners, the Cleveland Clinic, which operates 32 new beds. By year-end, we expect to open a 45-bed rehabilitation hospital in Temple, Texas, and a 32-bed acute rehab unit in Orlando, Florida. We also anticipate adding ten beds to an existing rehab hospital with our joint venture partner Riverside in Virginia.

Moving to 2026, we expect to open three new inpatient rehab hospitals including a 58-bed facility in Tucson, Arizona, in partnership with Banner Health, a 63-bed hospital in Ozark, Missouri with Cox Health, and a 60-bed hospital with Atlanticaire in New Jersey. Additionally, we plan to add two acute rehab units and two neurotransitional units to further enhance our continuum of care and rehabilitation. Looking ahead to 2027, we are preparing to launch a 76-bed rehab hospital in Jersey City, New Jersey under the Kessler brand. Beyond these projects, our pipeline remains active and promising with additional opportunities under various stages of development.

As we advance these initiatives, we will remain focused on strategic investments that drive sustainable growth and long-term value for our shareholders. In addition to development, we continue to evaluate opportunities to increase the return on capital to our shareholders through share repurchase and cash dividends. This quarter, the Board of Directors approved a cash dividend of $0.0625 per share which is payable on November 25, 2025, to stockholders of record as of November 12, 2025. These actions reflect our ongoing commitment to enhancing shareholder value and positioning the company for continued success. This concludes my remarks. I'll now turn the call over to Thomas Mullen, for additional remarks regarding financial performance for the quarter of each of our segments.

Thomas Mullen: Thank you, Bob, and good morning, everyone. On a consolidated basis, revenue grew over 7% to $1.36 billion compared to $1.27 billion in the prior year. Adjusted EBITDA also increased over 7% to $111.7 million, up from $103.9 million. Earnings per common share from continuing operations rose over 21% to $0.23 compared to $0.19 per share in the same quarter last year. Moving into our segment results, we will start with the inpatient rehab hospital division, where we delivered another strong quarter. Revenue increased 16% year over year to $328.6 million and adjusted EBITDA was up 13% to $68 million. Our revenue per patient day increased nearly 5% and our average daily census rose 11%.

Occupancy improved to 83% from 82%, with same-store occupancy rising to 86% from 85%. Our adjusted EBITDA margin declined slightly to 20.7% from 21.3%. In our outpatient rehab division, revenue increased 4% to $325.4 million, which was driven by over 5% growth in our patient visits. Net revenue per visit decreased to $100 from $101 in the same quarter last year. The decrease in net revenue per visit was driven by a reduction in our Medicare reimbursement and an unfavorable shift in payer mix. Adjusted EBITDA decreased over 14% to $24.2 million with margin declining from 9.1% to 7.4%.

In our critical illness recovery hospital division, our revenue increased over 4% to $609.9 million while adjusted EBITDA rose over 10% to $56.1 million, up from $50.8 million in the same quarter of last year. Our adjusted EBITDA margin increased to 9.2% from 8.7%. Occupancy remained steady at 65% with our admissions up 2.1%. That concludes my remarks and I will turn the call over to Michael F. Malatesta for financial details before we open the call up for questions.

Michael F. Malatesta: Thank you, Tom, and good morning, everyone. At the end of the quarter, we had $1.8 billion of debt outstanding, and $60.1 million of cash on the balance sheet. Our debt at quarter end includes $1.04 billion in term loans, $150 million in revolving loans, $550 million in six and a quarter percent senior notes, through 2032 and $47.1 million of other miscellaneous debt. We ended the quarter with net leverage of 3.4 times under our senior secured credit agreement, and have $419.1 million availability on our revolving loan. Our term loan carries an interest rate of SOFR plus 200 basis points and matures on December 3, 2031.

Interest expense was $30 million compared to $31.4 million in the same quarter last year. For the quarter, cash flow from operating activities was $175.3 million. Our days sales outstanding or DSO from continuing operations was 56 days at September 30, 2025, compared to 60 days at September 30, 2024, and 58 days at December 31, 2024. Investing activity issues $32.6 million which includes $53.1 million used for purchases of property and equipment offset by $22.1 million of proceeds from the sale of interest in one of our hospitals.

Financing activities used $135 million including $100 million in net repayments on our revolving line of credit, $7.7 million in dividends, $17 million in net distributions to noncontrolling interest, and $2.6 million in term loan repayments. We are reaffirming our business outlook for both revenue and adjusted EBITDA for 2025. We expect revenue to be in the range of $5.3 billion to $5.5 billion and adjusted EBITDA to be in the range of $510 million to $530 million. We are increasing our estimate for earnings per common share to be in the range of $1.14 to $1.24.

Excluding capital expenditures subsequently contributed to nonconsolidating joint ventures, we still expect capital expenditures to be in the range of $180 million to $200 million. This concludes our prepared remarks. At this time, we'd like to turn the call back to the operator to open the line for questions.

Operator: Thank you. If you would like to ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. If you would like to withdraw yourself from the queue, press 11 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. The first question for today will be coming from the line of Benjamin Hendrix of RBC Capital Markets. Your line is open.

Benjamin Hendrix: Great. Thank you very much. I appreciate the opening commentary about the 20% transmittal delay. Wanted to see if you could focus a little bit on the ongoing impact of the high-cost outlier, what it's doing to the admission volume, occupancy, and what types of mitigation tactics you guys can employ to help offset that. And then just close with any developed conversations in Washington. Thank you.

Thomas Mullen: Sure. Good morning, Ben. This is Tom Mullen. I'll start with your question. To your point about the high-cost outlier and the fixed loss threshold continuing to increase at a pretty dramatic rate over the last four years and now sitting at just under $79,000. It does have a negative impact on our LTAC business because whenever you think of how our LTACs are positioned across the country, many of our LTACHs are with some of the largest academic medical centers that carry the highest case index and most acute patients across the country.

So as we see that fixed loss threshold continue to go up, we're unable to accommodate as many of those very acutely ill patients just because there's so much more loss to get to any outlier reimbursement. So it has had an effect on our ADC, and some of the mitigation efforts that we have. We're fortunate that we have inpatient rehab hospitals in those shared markets in most of our shared markets with the large academic medical centers that we partner with.

And we're able to use those as downstream opportunities to get some of the patients moved from the LTAC to the inpatient rehab as they're able to take more acutely ill patients and we get our rehabs able to do that. So we've seen year over year our patient days or our length of stay on some of these patients has decreased by one and a half days on our patients. As a result of that, our ADC is down slightly but our admissions are up. So obviously we're going to continue to focus on that high-cost outlier threshold. And I'll let Bob comment on what we're doing in DC to try and combat some of those efforts.

Robert A. Ortenzio: The environment in DC is one that I think I characterize it as better than it's been historically. I think we have more open channels with both CMS and the committees of jurisdiction in the House and Senate, our energy most recently has been to try to get the deferment of the 20% transmittal so that it would be reports and the high labor costs coming out of the pandemic. So as I mentioned in my earlier comments, we are pleased with that. However, it does not solve really more of the long-term challenges that we have.

Just to point out that, that fixed loss threshold the last four years has gone from $38,000 to $59,000 then to $77,000, and then we did get, I think, a bit of a break with it being at $79,000 still quite an increase, but a bit more modest when you consider that the proposed rule had the fixed loss threshold of being $91,000. Which would have been extremely punitive had that been implemented in the last proposed rule. So as always in this industry, we are holding our breath for the proposed rules to come out, and then that is an avenue for us to comment.

But it is true that while the regulatory environment is difficult because the outlier pool is supposed to stay at a little bit below 8% and the mechanism that CMS has is to continue to push up the fixed loss threshold to try to come within that legislative mandate of the 8%. But on the other hand, it works against the policy for LTACHs, the overreaching policy for LTACHs, which is to have them take the higher acuity patient. So there's a push and pull there that I think is difficult to reconcile.

The only thing that we can do is continue to advocate on behalf of the sickest of the sick patients that go into the particularly to our LTACs. I hope that answers your question, but if you have a follow-up please ask.

Benjamin Hendrix: No. I think that covers it. Thank you very much.

Operator: Thank you. One moment for the next question. Our next question will be coming from the line of Justin Bowers of DB. Your line is open.

Justin Bowers: Hi. Good morning, everyone. So I'll just stick with two quick ones on LTACH. So number one, Bob and Tom, is there has there been any discussion with CMS or in DC about raising the targeted amount of payments or that 8% threshold to something higher in terms of, like, percentage of outlier patients. And then two, there's a lot of moving parts with reimbursement, but you did get an increase for 2026. And, you know, a modest increase for the HCO.

Are the trends that we're seeing now as it relates to, like, length of stay and ADC, is it just is that a good way to think about sort of, like, how the business should trend on the go forward? Absent any other big changes?

Robert A. Ortenzio: It's a great question, and I think the best way for me to respond is to say this. There are lots of levers in a very complicated reimbursement system. As I've said before on this call, LTACH reimbursement has become mind-numbingly complicated. And I think we hear that from our shareholders and from the analyst community because if you go with the fixed loss threshold, you go with site neutral, you look at the compliance requirement of twenty-five day length of stay, you look at an 8% outlier pool, these are all levers that can be pulled.

For us, for Select, and I think for most of the industry, we'd be happy for relief to come from any of those levers. And for me, just from a just strategically, I like to propose to policymakers ranges of options that they could do to help the industry that is no secret over the last four or five years has struggled as an industry. And so we are putting all options on the table for relief. And it's hard oftentimes for us to know either from a legislative or a regulatory standpoint, what are the paths of least resistance for regulators? Sometimes we don't always know from a transparency standpoint what they feel they can do more easily.

Sometimes the regulatory CMS feels that they're restricted by some legislative constraints. And legislative branch doesn't want to oftentimes impose too much on what they view as a regulatory playing field and encroach upon that. So we try to work with the rest of the industry to put as many options on the table. Obviously, you hear about the ones that are most difficult for us. I mean, it is trying when the fixed loss threshold has been going up as dramatically as it has over the last couple years. So that's obviously an easy one, but may not be the easiest one for CMS to solve for. So we obviously put other options on the table.

Justin Bowers: Thank you. Appreciate that. And then just pivoting, you know, there's a lot of development activity, especially on the IRF side over the next couple of years. Can you help us understand how much of the CapEx this year is maintenance versus growth?

Michael F. Malatesta: I'll take that question. So, Mike, Maintenance for this year, we're projecting overall a $182.1 million. Maintenance is going to range that $100 million to $105 million range. So the remainder is related to growth.

Justin Bowers: Okay. Thanks so much. I'll jump back in queue.

Operator: Thank you. And our next question will be coming from the line of Anne Hines of Mizuho Securities. Your line is open.

Anne Hines: Good morning. Thank you. You said in the prepared remarks that you had a revenue benefit from the delay of the 20% transmitter rule. What was the impact in the quarter from a revenue and EBITDA perspective?

Michael F. Malatesta: Anne, the net impact when we take into account the revenue and some expense reversals was in the $12 to $15 million range for EBITDA for the quarter.

Anne Hines: Okay. And then what about for the year? Because you didn't raise, like, I would assume this would have been a benefit to guidance. Is there something else going on that you didn't raise guidance for the positive change?

Michael F. Malatesta: Well, as you saw, we had some softness in our outpatient segment this quarter. So while we're comfortable raising EPS guidance, we thought it was prudent just to maintain EBITDA guidance.

Anne Hines: Okay. And just from a year impact, like, what was the delay? I know that was the quarter, the twelve to fifteen, but what impact did it have on your guidance for the total year?

Michael F. Malatesta: So for the year, we really did not have just a negligible not a de minimis impact for Q4 because I think as we as Bob alluded to earlier, that as the timeline progressed, it had less of a significant impact 20% transmittal rule, because we had more labor periods to compare against.

Anne Hines: And maybe you mentioned outpatient. Can you give us some more detail on what type of softness you're seeing? And the impact? Yeah. And what do you think is driving it? That's what we saw.

Michael F. Malatesta: We did have a nice increase in volume of approximately 5%, but we did have pressure on rate. Medicare has been a headwind that we've had to deal with for all of 2025 and actually the last few years, it's significant. We also did see deterioration in our mix for this quarter. We look to get that back on track, but just not the mix within categories, but sometimes the mix within the mix of certain geographic areas. Certain managed care commercial payers.

Anne Hines: Okay. And then maybe focusing on 2026. I know you're not giving guidance today, but are there any high-level headwinds and tailwinds that you want to call out?

Michael F. Malatesta: Well, I think the one thing with outpatient that we have not experienced in the last five years is even though it's modest, there will be an increase for Medicare. Medicare. Our Medicare Advantage payer. So that is I consider that some type of a slight tailwind. And also, I think, Tom can speak to this too. The significant development that we've communicated going into next year.

Thomas Mullen: I think starting just with LTAC briefly, we'll have the 20% transmittal back in place starting this October 1 and rolling in by cost year. So it will be a bit of a headwind, but far less because of the point Mike just made about the labor markets and being farther from the pandemic. Labor costs. So we will be able to mitigate that far more than what we would have experienced prior past year. And as it relates to inpatient rehab, there's a fair amount of development that to get started in 2026 with new hospitals.

And there's also consideration for converting more of our LTAC beds to markets where there's rehab demand to add an ARU within our LTACs. So you'll see a fair amount of rehab growth in the next year.

Anne Hines: Alright. Maybe one more question just on rehab. Can you remind us, like, when you build a development hospital, how long to break even and how long till you get to your, like, peak margin profile?

Michael F. Malatesta: It's hi, Anne. It's Mike, I'll pass it again. It's approximately six months until we get to about breakeven. For full maturity, it's around the three-year mark that we're at that 85% occupancy that we have for our core hospitals.

Anne Hines: Perfect. Okay. Thank you.

Operator: Thank you. One moment for the next question. Our next question will come from the line of Joanna Jeddjuk of Bank of America. Your line is open.

Joanna Jeddjuk: Hi, good morning. Thank you. Thanks for taking the questions. Couple of follow-ups. So on the 20% transmittal rule, delayed implementation. So because of the more recent cost reports will be used should we think about the, I guess, the headwind much smaller than the $12 to $15 million you saw in 2025.

Michael F. Malatesta: Hi, Joanna. I think your question is that for next year we project the impact to be much less in '26 than it would have been if it was implemented for '25. Yeah. And we think the impact will be maybe approximately a third of what we would have if it was put in place for this and not rescinded.

Joanna Jeddjuk: Okay. That's super helpful. And I guess to Bob's commentary around the environment, you know, maybe a little bit warming up or at least open channel so that's positive. And I guess as we think about, you know, heading into next year and the proposal for fiscal twenty-seven. So any indication whether the CMS, you know, was propose again to increase the outlier threshold to $90,000 or you think that's kind of off the table? How should we think about that?

Robert A. Ortenzio: Well, the short answer is no idea. There is the answer for schools are just absolutely blacked out. I mean, this is why they become such a big event for us every year because there is literally no discussion ever that comes out of CMS on the proposed rules for reasons which you can appreciate. Those things are locked down. They get drafted, they circulate around the administration before then they're released under I think, the most extreme confidentiality.

Joanna Jeddjuk: Okay. So I guess we just have to wait and see. Alright. That's fine. I was just checking. And if I may, a couple of more follow-ups. On the outpatient rehab, so you said that the weakness in that segment was because of the it sounds like, a payer mix. So what exactly is happening? Is it just like you said, there's something with different markets growing differently, or there's some sort of, like, managed care denying care or not paying or anything else that's going on there?

Michael F. Malatesta: Well, yeah, the first part is with Medicare, there's over 3% decrease this year. So a challenge that our had to face the entire year. For this particular quarter though, we did see a slight shift in mix to Medicare, Medicare Advantage, and also, it depends within, you know, which geographically, which areas have, you know, comprised more you know, a little more of your volume. And also within managed care commercial, that's a wide basket. Certain payers pay differently. It's higher and lower than others. So this quarter we did had, as we say, a shift in our mix, but along with our sustained Medicare cut that we've had to endure all year.

Again, that is going away next year where we'll have a modest increase.

Joanna Jeddjuk: Right. Because there was my other follow-up. But before I ask that, so on this on this Payomet, so should we think this is something, you know, that could persist in terms of these margins, you know, all the way down to 7%? And is there something you can do to kind of mitigate that headwind?

Michael F. Malatesta: Well, I we don't think this is something that's going to persist. Again, with Medicare, that's going to help with Medicare and Medicare Advantage. With an increase. But on our you know, we've also talked about in the past putting investments into our systems. And this is where going into next year, you know, with our, our investment in our scheduling module, that should facilitate it. Plus, there is a focus to kind of rectify maturation mix.

Joanna Jeddjuk: And then, yeah, my follow-up on the outpatient rehab, medic rates next year, So we don't have the funnel back yet. Right? I guess, might be delayed. But based on the proposal phase, the proposal is finalized as proposed without any changes. But what will be the rate update for your rehab therapy code? I mean, we were estimating it's got to be, you know, 2.6 to 2.8, but any estimate that you can share for us Thank you.

Michael F. Malatesta: Actually, with the mix of codes, there's just a few codes that predominantly make up the base of revenue over 95% of your revenue mix for therapy codes, We're a little more modest. We're around that 1.8, 1.75% increase for next year. We need to take all factors into account. For Medicare?

Joanna Jeddjuk: Okay. But it's still better than the current, so I guess. Yes. Yeah. And if I may, just very last question. It's just talking about this how the segment did versus your internal expectations. So you said the outpatient was a little worse. And then, you know, the LTAC business or the critical illness hospitals Sounds like we're better because of this reversal. But outside of the reversal, how are the trends in the critical illness hospitals? And also, how did the IRF segment versus your internal? Thank you.

Michael F. Malatesta: Well, I think, you know, and Tom can maybe elaborate on critical illness, but think we're all in agreement for inpatient rehab. It just continues to exceed our expectations this year. And in critical illness, we did see occupancy increase compared to prior year. But as everyone on this call knows, in the critical illness business, there's a fair amount of seasonality and we're always going to see a decrease in the third quarter. Then we start to really pick back up as we enter October in the fourth quarter. As the seasons start to change, we start to see respiratory volumes start to pick up. So we saw the normal trend that we see every year in critical illness.

But compared to the prior year same period, occupancy was ahead admissions were ahead, and revenue was ahead. But obviously, the twenty percent transmittal deferment played into the rate increase.

Joanna Jeddjuk: Thank you so much.

Operator: Thank you. One moment for the next question. And our next question will be coming from the line of AJ Rice of UBS. Please go ahead.

AJ Rice: Hi, everybody. First, maybe just to ask you on the rehab development pipeline. Do you have a sense of what the relative start-up costs that you experienced this year and how that might compare to next year? Is that number gonna be a tailwind a headwind for you? And know, your biggest peer in that segment is talking about potentially changing the footprint model a little bit, large smaller facilities, etcetera, to go into a new market. Are you anything going on in the in your approach to the sizing of these development locations, that's worth calling out?

Michael F. Malatesta: Hey, AJ. It's Mike. In regards to losses, we've had a pretty consistent cadence from last year and projected into next year. We're projecting approximately $15 million to $20 million of start-up losses per annum. So that's gonna be fairly consistent. Tom's gonna speak to our strategy on the set size of the hospitals.

Thomas Mullen: Our focus will remain partnership focused. And looking to expand partnerships with the larger health systems across the country. So you'll see more, new partners added in coming year or two. Across the country. You'll also see us in our markets where we're running at or near capacity. With existing partners. We'll be adding new hospitals at, like, Bob spoke to in his opening remarks where we added a fourth rehab hospital with Cleveland Clinic that just opened earlier this week. There will be additions in our existing markets, but we'll be looking to add large new academic medical centers within patient rehab as well. We typically build 60-bed rehab hospitals.

We're considering 80 to a 100-bed rehab hospitals in future markets. Where there the demand deems it necessary.

AJ Rice: Okay. Interesting. Thanks. Any thoughts on labor? I think you've sort of tangentially commented on a couple of times across different business lines, but what are you seeing there as you think about '26? It sounds like it's probably more stable labor environment than you've seen in a number of years, but I just don't wanna put words in your mouth. What sort of the cost trend on labor that you're seeing this year and for the different business lines, and do you see it being pretty stable going into next year?

Michael F. Malatesta: So, AJ, I mean, if we're gonna go back to what we call, you know, the agency right, that's the challenges we had in '22 and the '23. Agency within our critical illness divisions has, utilization has been consistently around 15%. So that's been very stable. Our HD rates, again, are back to pre-COVID levels. And full-time, you know, I think with full-time increases for full-time equivalents across all three business lines, been fairly consistent and actually a little under 3%. So it is a much more stable environment than we've encountered a couple years ago.

AJ Rice: Okay. Interesting. The last question, on leverage, you're down to 3.4 times now at this point. Is what how should we think about that going forward from here? Is that sort of a stable area roughly that's comfortable and as you sort of debt pay down maybe is less of a priority. Does it change your thinking about capital allocation in any way?

Robert A. Ortenzio: No. AJ, this is Bob. The 3.4 is a stable, comfortable leverage. We can take it down. But as you've heard Marty and I in the past talk about it, you know, it's opportunistic. I mean, divided by the CapEx for development is obviously our number one priority. And then you've got dividends, you've got stock buybacks and you've got debt reduction is then on the list. And we'll take advantage of the one that is the most advantageous to us, and we'll take the one that the market gives us.

AJ Rice: Okay. Alright. Thanks so much.

Operator: Thank you. And we now have a follow-up question from Justin Bowers of DB. Please go ahead.

Justin Bowers: Hi. Thanks for getting me back on. I just wanted to follow-up on PT. So, Mike, what percentage of your MA rates are pegged to the fee schedule? And then the follow-up to that would be do you have a sense of I mean, you know, Medicare has been a headwind for quite a few years now. Any sense of what kind of drag that's been on EBITDA in the division? Over the last few years. And then you know, what can you do to get this back to double-digit margins?

Michael F. Malatesta: Okay. So let me take I think there's three questions there, Justin. So the first question is, approximately 80% of our Medicare Advantage is line is linked directly to the Part B fee schedule. So, and then I think your next question, if I remember, was what I'm sorry, Justin. Can you repeat your two questions again? Your last two?

Justin Bowers: Yeah. So it was just you know, there's been I think there's been what, a decrease in the in the know, there's been headwinds for what? Four or five years now? Yes. Four or five years. That's the decrease in the last four or five years, and that metric we look at is if we just had a 2% increase a modest increase over the last five years, versus the cuts that we had we calculate that as only $65 million directly to our bottom line.

Justin Bowers: Okay. And then is this, you know, the rate increase is gonna help you know, any other levers that you can pull to sort of, like, to get this thing back to double-digit margins?

Michael F. Malatesta: Well, you know, the focus and the focus going into '26 is going to be on productivity. So, you know, that's where we've invested in our systems in the scheduling module. But just minor increases in productivity will have a large impact on our bottom line. So that productivity and enhancements our systems, our front-end system is gonna be a focus for outpatient in the year to come.

Justin Bowers: Okay. Thanks for squeezing me back in.

Operator: Thank you. And this does conclude today's Q&A session. I would like to go ahead and turn the call back over to Mr. Robert A. Ortenzio for closing remarks. Please go ahead, sir.

Robert A. Ortenzio: Thank you, operator. There are no closing remarks. We'll look forward to updating you next quarter.

Operator: This concludes today's program. May all disconnect.